India has created quite the stir in LNG markets recently. Indian gas distributor, Petronet, has successfully renegotiated two import contracts in the last two years. Both renegotiations were with major LNG sellers: Qatar’s Rasgas in December 2015 and Exxon Mobil in September 2017. Petronet is not alone in this unusual pursuit to rework long-term contracts. GAIL, India’s largest natural gas distribution and processing firm, is currently in talks with U.S. LNG exporter Cheniere and Russia’s Gazprom to rework purchase agreements. For a market built on contract sanctity, India’s enthusiasm for renegotiation has set off rampant speculation among analysts.

Will India’s approach appeal to the big three Asian LNG importers: China, South Korea, and Japan? Are we entering a new era of increased contract flexibility for LNG producers?

The impact of China, South Korea, and Japan following India’s lead would be significant: these three countries made up over 55% of global LNG imports in 2016.[1] The good news for producers is that renegotiation becoming a trend in North Asia remains unlikely. In a recent interview with Energy Intelligence, Jera Chairman Henrik Gordenker took a dim view of price arbitration and the potential of Asian contract renegotiation.[2] His perspective carries weight: Jera represents the combined purchasing might of two major Japanese energy firms, Tokyo Electric and Chubu Electric. Historically the world’s leading LNG importer, Japan’s imports counted for over 30% of all LNG imports in 2016.

Rather than herald a shift in industry norms, Petronet’s successful renegotiations say volumes about sellers’ projections for future market conditions. There have been two main schools of thought regarding the supply and demand dynamics of the next five years. The Petronet renegotiations clarify which of these views some major producers are taking.

The first school of thought posits that an enormous wave of LNG liquefaction capacity, too large to be absorbed by current and projected import capacity, will come online between now and the early 2020s and destabilize LNG markets. Spot market prices will drop to new lows and liquefaction capacity utilization rates will fall. This increase in liquefaction capacity will take place almost entirely in Australia and the United States. Australia has 30 million tons per annum (MTPA) of capacity coming online by 2019, while the US has 57.6 MPTA currently under construction. For context, global liquefaction capacity consisted of approximately 340 MTPA in January 2017.[3]

The second school of thought, eloquently argued for by Oxford Institute for Energy Studies scholar Howard Rogers, anticipates that this rise in production will drive demand. The market, aided by an increase in Floating Storage and Regasification Units (FSRUs) that expand access to LNG regasification, will thus absorb the added supply.

From the successful Petronet negotiations, it becomes clear that Rasgas and ExxonMobil figured that lowering the pricing formula made sense but only if the deal included an increase in total volume sold. In both deals, Petronet secured their lower pricing formula by agreeing to buy increased volumes. According to India’s Economic Times, the renegotiation with Qatar’s RasGas included a provision that Petronet take an additional one million tons of LNG per year. Exxon Mobil’s reworked deal reportedly included a similar clause: an additional one million tons of LNG per year.[4]

Rasgas and ExxonMobil arguably prioritized increasing total sales over maintaining higher pricing formulas because they project that the coming wave of liquefaction capacity won’t be absorbed by increased market demand. The risk of getting stuck with unsellable product was likely judged high enough to justify selling at a much-reduced pricing formula. Exxon Mobil’s 2017 Outlook for Energy confirms this outlook, projecting that “LNG will remain highly competitive due to abundant gas resources and many aspiring exporters.”[5]

While it is impossible to predict the future, especially when it comes to energy markets, it doesn’t stop firms from taking bets. India’s contract renegotiations give an indication of which way major LNG sellers bet the markets will go.